When Paying Less Actually Costs More!

Let me just say up front that this “point of view” is not a defense of the Seattle Minimum Wage. Truth be known, I am not a fan of any government insert into the what, when and how employers pay their employees, believing instead that the competitive marketplace, not a mandate, ultimately pays people what they are worth.

No, this “point of view” is a much more pragmatic conversation about the issue of competitive pay. It is another in a series of articles I have been writing lately to provide perspective to Seattle area employers who find themselves working in a very changed recruiting and staffing marketplace.

What’s Going on in the Greater Seattle Job Market?.

At the end of October, the national unemployment rate reached a seven year low, close to 5%. The unemployment for the Seattle marketplace was even lower, hovering somewhere between 3-4% for most of the year.

PACE saw the first signs of the market shift in late 2012 when our larger clients starting hiring. By late 2014, a noticeably “candidate leaning” marketplace was surfacing – employers, large and small, were starting to feel the pinch of finding and hiring quality employees. By early 2015, the war for talent was in full swing, with employers of all sizes back in the hiring market for the first time since 2007.

As hiring increased, candidates become more selective about both the jobs and the rates of pay they were willing to consider. While in the IT, Accounting, Clinical professions, supply/demand dynamics have been an issue over the last decade, 2015 marked a point when similarly styled wage pressures impacted all categoriees of employees – from workers on the warehouse or factory floor to management or executive professionals in the C suite.

The employer’s reaction to this shift in marketplace dynamics has been mixed. While most of our larger clients have seemed well positioned to absorb competitive wage adjustments, our smaller, more profit challenged clients, have reacted differently, expressing concerns about their ability to increase wages and still remain profitable. Employers who have resisted wage increases have faced both recruiting and retention set backs. The general wisdom that this is not a time when employers can afford to let current employees become the recruiting targets of more pay aggressive competitors.

While acknowledging the profit challenges most companies are still facing, I’d like to take a closer look at the belief that “we can’t afford to pay more”. While pay plans have to be “affordable” to be sustainable, we’ve seen too many situations where “low pay” staffing models have actually added to overall staffing costs.

As just one example, I’d like to share a consultation I recently had with an HR Director of a local company who had reached out to PACE for recruiting help for their customer service team. Their story was typical of many “low pay” scenarios – jobs that once could be filled quickly, were now taking weeks if not months to fill, and oftentimes with mixed results. Customer Service rep turnover had more than doubled; the customer service team had become a “revolving door”.

The HR team believed that a big part of the problem was their entry level pay. Starting pay rates for Customer Service reps had not been adjusted since 2009 when market conditions made it relatively easy to recruit and retain great reps with little to no wage pressure. Keeping wages at 2009 levels was a staffing strategy that looked too good on paper to inspire senior decisions makers to make a change.

Our pre meeting research confirmed HR’s worse fears. Our data showed that their current pay plan put them into the bottom 10% of pay plans available in the local market. The level of customer service employees they were seeking, were one of the “highest demand” candidate groups in the Seattle job market. We had data to show that there were only three candidates for every eight jobs posted within 10 miles of this employer.

While HR was aware they had a problem, our recruiting data put in very black and white terms the reasons why.

We went on to explore three areas of operational performance that were likely being impacted by their “low pay” staffing model……

1. The Direct Costs of Finding and Hiring Replacement Candidates.

Unfortunately, as those of us in the recruiting business know, problems with below market pay rates are not solved by more or better recruiting. Upgrading job postings, adding a social media campaign, or expanding the number of recruiters trying to locate candidates, will not produce a candidate that doesn’t exist.

Employers who attempt to solve a “below market pay” problem with more/better recruiting, can grow their staffing costs exponentially, while still not solving the problem, and this employer was no exception. Their recruiting process had become a nightmare. Not only was the revolving door incrased the jobs that needed to be filled, but the company was no longer attracting the type of candidate they needed to hire. With internal recruiting resources exhausted, they had been reaching out to staffing agencies for help that simply wasn’t coming.

#2. The Direct and Indirect Costs of Turnover.

In today’s marketplace, when a company becomes known as a “low pay” employer, both the retention of current employees and the company’s ability to attract new job candidates is impacted. If their low pay tactics persist, the impact of a “revolving door” escalate quickly, growing additional costs associated with…….

Recruiting replacement employees

Training replacement employees

“Lost opportunities” stemming from being short staffed and work either not performed or performed in a sub standard way by new employees

While their HR Director was well versed in the “high costs” of turnover and knew their turnover was out of hand, she had not taken the time to see how those costs applied to the customer service team. She also hadn’t checked the employee reviews that were bubbling up on Glassdoor and Yelp.

#3. The Indirect Costs of a Deterioration in Employee Quality.

In today’s job market, candidates have many choices about where to work. How much they will be paid is oftentimes the most important factor in what company’s they choose to approach, what job postings they respond to.

While this employer knew that job candidates were turning down their offers of employment, there was an even larger issue in play which was that the caliber of candidates they were attracting to their company had been deteriorating significantlly over the last 18 months.

Our question – “If the candidates you want to hire are busy applying to job postings elsewhere, who is left to apply to your job postings? Our belief? While there are many direct costs associated with a low pay strategy, they pale in comparison to the costs of a pay plan that systemically eats away at employee quality.

Once agreed that the issue to be tackled was pay not recruiting, our conversation shifted to ways to influence change. One of the challenges for many HR teams is convincing a cost focused C suite that keeping wages “low” isn’t always the way to keep overall costs low.

To help their HR team present the case for raising pay, we prepared a simple worksheet that showed in dollars and cents how much their current “low pay” cost structure was costing and how those costs could be reduced by adjusting pay to a point where it would attract a better quality employee. Our worksheet provided a side by side comparison of overall costs associated with two staffing scenarios – the current low pay scenario and a future, market competitive pay rate scenario. The numbers highlighted represent the changes we believed would incur in Scenario 2.

Scenario 1 – Current

Scenario 2

DIRECT (Pay, Benefit) COSTS

Pay Rate

$13.00

$16.00

% Increase in Pay Rate

23.1%

Statutory Burden %

13.5%

13.5%

Premium Based Benefit Costs/Hr

$2.94

$2.94

Number of Employees

12

10

Hours Per Year Per Employee

2,080

2,080

% of Positions Filled (Average)

75.0%

90.0%

Hours Per Year – All

18720

18720

Direct Costs – All

$331,272

$395,014

TURNOVER COSTS

Turnover Percent

150.0%

33.0%

Employees Leaving/Year

18.0

3.3

Replacement Costs Per Turnover

$3,000

$3,000

Lost Opportunity Costs Per Turnover

$6,000

$6,000

Costs of Turnover – All

$162,000

$29,700

Total Costs – Direct, Turnover, All

$493,272

$424,714

Real Cost Per Hour

$26.35

$22.69

Difference / Hour

$3.66

Cost Per Hour Reduction

13.9%

In this particular case, a comparison of the two scenarios told a compelling story – by increasing across the board pay rates – in this case by 23% for both current and future employees and reducing the costs of turnover associated with a low pay strategy, overall staffing costs can be reduced, in this case by close to 14%.

We do not yet know the outcome of this HR Director’s attempts to solve their staffing challenge. We do know that whatever solution they pursue, they have a good understanding of their staffing challenge and how their “low pay” strategy has been impacting both their recruiting and their overall operational performance. While in the end I was politely saying that “PACE is likely not the solution you need”, we provided them with a tool to advocate for the solution they did need.

Need help working with some version of a “low pay” strategy that is no longer working? Having challenges talking with your C suite about the low pay jobs in your company? To request a personal and confidential consultation about the relationship between pay and turnover, or anything staffing, contact us at infodesk@pacestaffing.com , or e mail me directly at jeannek@pacestaffing.com

Jeanne Knutzen is the owner, President, and founder of the PACE Staffing Network, an award winning staffing company doing business in the Greater Seattle job market for over 35 years. For a complementary and confidential consult on how to get your company or department better prepared for a very changed recruiting marketplace in 2016, contact Jeanne at jeannek@pacestaffing.com